Brexit: A Tragedy for UK Fintech

Brexit is a tragedy for the nascent UK fintech scene. Withdrawal from Europe will irreparably harm one of the few bright spots in the UK economy.

Of passports and sandboxes

EU membership has been good for Britain, and nowhere more so than in the growing UK fintech sector. UK fintech benefits from a unique regulatory environment: access to the single market, with fewer regulatory burdens than other European financial centres.

EU rules mean that a financial services product approved in one member state can be “passported” into any other, removing the need to get multiple regulatory approvals or open multiple local branches when you roll a product out across Europe.

The regulators in the UK are much more liberal than other European regulators when it comes to authorising new and potentially disruptive financial products. The UK government has made it a policy priority to lead the world in fintech: to do this, it has encouraged UK regulators to offer lower compliance burdens for startups testing new financial products.

For example: UK startups can test their ideas within the so-called “sandbox” scheme, a safe place for fintech startups to experiment without being subject to all the usual compliance burdens. So far, no central European regulator has anything like the sandbox scheme to help entrepreneurs work through the inevitable regulatory challenges associated with innovative new products.

London’s dominance of European fintech is built on this unique regulatory environment. The UK government makes it very easy for fintechs to develop a new product and get a passport authorisation to export it throughout Europe. UK fintechs have the best of both worlds: the UK makes it very easy to get a passport, and the EU makes it very easy to use that UK passport to scale rapidly across the EU’s 500m consumer market.

The end of passporting

All of this will change after the UK’s exit from the EU. This morning the ECB confirmed that unless the UK accepts free movement of people (which is extremely unlikely given the central focus of the leave campaign), the EU will close off the passporting system from the UK when the country exits the EU.

This will be catastrophic for the UK’s nascent fintech sector. UK fintechs who want to scale through Europe would need to contend with two home regulators: one in the UK, one in Europe. What’s more, it’s going to be a lot more difficult to get a passport in risk-averse central Europe than it has been in startup friendly UK, where regulators have made so much effort to embrace new financial services products.

What next for fintech?

Tech business models almost invariably rely on fast scaling across a large market: it’s just not possible to build a unicorn relying only on the UK’s 65m market. Without access to European markets, London simply no longer makes sense as the destination of choice for an ambitious fintech startup.

The uncertainty around a protracted exit process, a predicted recession in the UK and the growing awareness of the challenges that fintechs will face post-Brexit is already causing many fintechs to rethink their home base, focusing on cities such as Dublin and Berlin which have a secure future within the EU. The exodus has the potential to become a worrying downward spiral: as fintechs migrate to other centres, they will take with them the ecosystem of talent, investors and professional services that make Silicon Roundabout the hub it is today.

Before the Brexit vote, London was the only city that had the potential to rival Silicon Valley as an innovation hub for financial services. After the vote, it seems highly unlikely that London can fulfil it’s fintech promise. One of the rare bright spots in the UK’s sluggish economy will be greatly diminished.